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Convexity of the central bank's loss function and dependence between monetary instruments

Author

Listed:
  • Marcelo de C. Griebeler

    (Federal University of Santa Catarina)

  • Ronald Otto Hillbrecht

    (Federal University of Rio Grande do Sul)

Abstract

In this paper we obtain conditions under which the central bank loss function is strictly convex in four different states of the economy: booming economy, recession, high inflation and high output. Moreover, we found that when inflation and output are linear functions of the monetary policy instrument, convexity is guaranteed for any of the four states mentioned. When we extend our analysis to the case of many instruments, we found that only linearity is not sufficient to guarantee the shape of loss function. Our results also provide conditions under which there exists dependence between instruments of monetary policy.

Suggested Citation

  • Marcelo de C. Griebeler & Ronald Otto Hillbrecht, 2014. "Convexity of the central bank's loss function and dependence between monetary instruments," Economics Bulletin, AccessEcon, vol. 34(4), pages 2275-2291.
    • Handle: RePEc:ebl:ecbull:eb-14-00670
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    loss function; convexity; monetary instruments;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

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